Much ado about new check law

Payments rule is one small step in automating banks

By

JackieCohen

SAN FRANCISCO (CBS.MW) -- The Check Clearing Act for the 21st Century, or Check 21, goes into effect Thursday without a visible hitch.

"The industry is ready for it operationally, even though the law may have a negative impact because it forces consumers to change their behavior," said Adam Dener, a partner at Capco, a bank technology consultancy.

A storm of complaints raised by consumer advocates over the new law may have been much ado about a technicality: basically, the law requires banks that don't scan checks into images to be able to do business with banks that already use the technology. See related story for a more detailed explanation of the law.

For most consumers, this simply means that their checks will clear faster, but deposited funds won't become available anytime sooner. Check 21 thus eliminates the "float" that some consumers have used in writing checks in anticipation of funds being deposited in their accounts days later.

Critics of the checking law have decried the elimination of the float. But despite the number of people who took advantage of the tactic it has never been a legal one.

"Writing a check when you don't have money in the bank is completely illegal, and has been for a long time. Check 21 simply makes it more difficult to break the law," said Tom Johnson, CEO of the Bank Administration Institute in Chicago. "And that's a good thing."

"You can also protect yourself from breaking the law by signing up for overdraft protection. Or, if you use electronic bill payment services, you can schedule the date that payees receive funds," Johnson said.

One advantage to electronic bill payment: there's generally no need to balance the checkbook because many applications do it automatically. That could help the majority of consumers who studies show never balance their checkbooks. See related story.

"We are seeing that the number of consumers using electronic bill payment is growing," said AnnMarie Coe, marketing manager for Microsoft's home and retail division, which includes the home banking software Money 2005.

Indeed, one in four households have paid at least one bill online, according to research by CheckFree, a Columbus, Ohio-based processor of electronic payments.

Paper pushers

The law will not eliminate paper checks. Americans still write 40 billion checks a year, according to Federal Reserve data; those volumes have declined by a few percentage points annually over the past four years.

But with overhead costs remaining fixed, the drop in volume has forced the central bank to raise the price of check clearing. Banks in turn pass these hikes on to consumers.

Check 21 might help reverse this trend, since promoting automation eventually lowers costs.

Today, one quarter of checks are processed with at least a modicum of automation. See related story.

Regardless of whether electronics factor into the processing, only a minority of paper checks ultimately wend their way back to the check writers in the form of cancelled checks: 36 percent of accountholders still receive them.

As of Oct. 28, some of these people may get so-called substitute checks instead -- but only if their own banks don't use any kind of imaging.

The substitute checks are scanned images of the original payment document, which is destroyed after it's rendered into an image. These replacements are now considered 100 percent legal tender under Check 21.

The new law doesn't require anyone to use imaging technology. It only mandates a way for banks that are so equipped to deal with banks lacking the systems: print a copy of the substitute check and snail mail it to the unautomated party.

"More than half of all banks use some form of imaging. But that doesn't mean that all of these banks use this technology to clear checks," said Johnson of BAI.

The electronic world

Unfortunately, check clearing has become a complex cycle, and Check 21 only refers to a portion of it. Ditto for check imaging.

Rooting out paper ultimately saves money, which could potentially be passed on to consumers. In the short term, however, implementing new technology raises costs.

"We're asking banks not to use the introduction of substitute checks as an opportunity for new fees," said Gail Hillebrand, an attorney with Consumers Union. "They should also waive bounced check fees between October 27 and January 1 and speed up funds availability."

While the law might not compel banks to follow these suggestions, competitive pressures might, since consumers increasingly shop around for banks.

Also, "there's an incentive for banks to do the right thing rather than be forced by law," said Johnson of BAI. "If a bank decides to speed up fund availability, lower prices or raise service, it has control over how to do so in the most efficient way that will please customers."

Check 21 was drawn up in response to September 11, 2001, when the U.S. transportation systems shut down for six days, hampering the movement of checks from one bank to another.

In addition to hurting banks and merchants, the 9/11 aftermath ultimately impacted consumers, who saw dramatic delays in payments -- that forced people to wait an extra week before their deposited paychecks and gift money became available to them.

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